Think twice before withdrawing money from your RRSP

Anyone with money saved in a group registered retirement savings plan (RRSP) has likely experienced the temptation to withdraw some of those savings for a new car or a tropical vacation. After all, retirement is so far off, a small withdrawal now won’t make any difference…will it?

Wait! Before cashing in your RRSP, there are a couple of things to consider:

First, an RRSP is a tax-deferred account. This means you don’t pay any tax on the money until it’s withdrawn from the plan. If you wait until you retire to withdraw funds, you will probably pay lower taxes based on your lower income. If you make withdrawals before retirement, you’ll pay higher taxes based on your higher income.

Second, a small withdrawal now can mean a big difference in the amount you have when you’re ready to retire. Let’s assume that at age 25 you started contributing $2,000 per year to your Group RRSP and continued to do so until you retired at age 65. During that period you earned an average annual rate of return of eight per cent.

If you did not withdraw any of your savings prior to age 65, you would have accumulated $561,562. Not bad!

Now let’s assume that somewhere along the way you decided to withdraw $5,000. Here’s the impact:

a) If you withdrew $5000 at age 50, your savings at age 65 would be $545,701, for a difference of $15,861.

b) If you withdrew $5000 at age 40, your savings at age 65 would be $527,320, for a difference of $34,242.

c) If you withdrew $5000 at age 30, your savings at age 65 would be $487,635, for a difference of $73,927.

By ‘borrowing’ $5,000 from your Group RRSP now, you could actually be losing $74,000 or more at retirement!

So, the next time you’re thinking about withdrawing money from your RRSP before you retire, remember two things: the taxman will take a bigger bite now than at retirement and a small withdrawal now can mean a big difference later.